Thursday, September 29, 2011

Capital Goods Orders & Shipments

One of our accounts is puzzled. On the one hand, he is reading about the weakness in so many economic indicators. He notes that many economists are raising their odds of a recession. On the other hand, he follows lots of capital goods companies. Their managements are still saying that their business is very good. Though I don’t expect a recession, I have been writing about the ongoing soft patch in many of the business cycle indicators.

However, my friend’s upbeat assessment of durable goods manufacturing is confirmed by the latest orders and shipments data. They remained remarkably durable through August. Let’s review some good news for a change:

(1) Capital goods shipments jump to cyclical high. Durable goods orders are still well below their early 2008 record high, both including and excluding the volatile transportation industry. Yet in August, shipments of nondefense capital goods excluding aircraft (NDCGx) jumped 2.8% to match the previous two cyclical peaks in 2000 and 2008. This category largely determines the capital spending component of GDP. Over the past three months, the three-month average of NDCGx shipments is up 15.3% (saar), the fastest pace since July 2010.

(2) Capital goods orders are also robust. NDCGx orders rose 1.1% in August, also matching the previous two cyclical peaks. Over the past three months, the three-month average of these orders is up 8.7% (saar).

It’s hard to put a negative spin on such strong numbers, other than to note that they looked this strong during the previous two cycles when they peaked and then took a dive. On a more fundamental basis, capital spending is driven by corporate profits and cash flow, which have been very strong. They should remain strong, though both are likely to grow at slower paces through next year.

Given that there still seems to be plenty of underutilized capital and labor in the US, the pace of capital spending is impressive. It is likely to slow given the slower pace of overall economic growth recently. However, exports should continue to account for an increasing share of durable goods orders and shipments. The global economy is slowing too, but it’s a big world.

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